In 2000, video rental giant Blockbuster, with brick-and-mortar stores across the United States, had the opportunity to purchase an unprofitable start-up for $50 million.

At the time, it may have been difficult to foresee that this one start-up, known as Netflix, Inc., would play a role in Blockbuster’s downfall over the next 10-15 years as technology and consumer preferences changed and streaming services replaced the need for video and DVD rental stores. This contributed to a major turning point for many well-established companies across various industries as they began to realize the importance of self-disruption, that is, the willingness to disrupt their own business model.¹ This also led to many bold claims of large-scale technological advancements that have fallen short. For example, Tesla CEO Elon Musk claimed in the mid-2010s that Tesla would be able to complete a fully autonomous drive, without the need for charging, from Los Angeles to New York City by the end of 2017.²

How do the concepts of disruption and self-disruption apply in an industry such as property and casualty (P&C) insurance, which is heavily regulated and historically has been slow to innovate? Start-ups began to see the possibility of revolutionizing the P&C insurance industry through the use of big data, machine learning, artificial intelligence (AI), etc., with the aim to improve the customer experience and better segment risk. Thus began the wave of start-ups and innovation in the 2010s known as the “Insurtech Era,” which peaked from 2018 to 2022 with global investment in this space exceeding $40 billion.³

Despite the enthusiasm and hype of recent innovation in P&C insurance, some claim that, “consumer insurance remains largely undisrupted” especially when compared to “the revolutions that have taken place in retailing, travel, and countless other industries.”⁴ Stock prices for well-known insurtechs Lemonade and Hippo lost 83% and 16% of their values, respectively, from one year after each company’s public launch until mid-September of 2024.⁵ Similar to other periods of rapid technological advancements, such as the dot-com bubble of the late 1990s and early 2000s, the Insurtech Era has experienced swings of booms and busts in recent years, which has created uncertainty regarding future advancements in the industry.

How can traditional insurance companies, which are companies that have been in business for at least several decades and have ongoing insurance operations in well-established markets, balance the need for disruption and innovation in the Insurtech Era with their continued success with more traditional products and markets? It is the goal of many senior level executives at traditional insurers to not merely avoid the fate of Blockbuster, but to transform the company into the “Amazon of Insurance.” Traditional insurers do not have the luxury of employing the “fail-fast” mentality that guides pure start-up endeavors. Instead, they must harness the innovation mindset of the Insurtech Era while balancing the need to continually increase shareholder value and meet policyholder obligations.⁶

An overview of the insurtech model

According to the National Association of Insurance Commissioners (NAIC), insurtech can be described as “the innovative use of technology in insurance” and may include technology such as “big data, the Internet of Things (IoT), mobile technology, AI, wearable devices, and blockchain.”⁷ Insurtechs, like other technology-driven start-up companies, focus on unmet needs in the insurance market.

Over the last several years, insurtechs have greatly expanded the use of pre-fill data to improve the user experience by decreasing the time to obtain an insurance quote by relying on quality data sources instead of user entry. Insurtechs also leverage usage-based insurance (UBI) models to more directly understand driving behavior, allowing the premium charged to consumers to better reflect their expected risk. Insurtechs focused on redesigning traditional products pose the largest threat to traditional insurance companies, as they may look to disrupt a well-established insurance market such as auto or homeowners insurance. Other insurtechs create entirely new products to address unmet coverage needs in the market. Some examples of new insurance products for emerging markets are policies covering airline sales, autonomous vehicles (AVs), and cryptocurrency mining operations.

While it is common for insurtechs to develop their own insurance products, an insurance company is necessary to underwrite the program. For many start-up insurtechs, establishing an insurance company or merging with a special purpose acquisition company (SPAC) may be cost-prohibitive. As a result, many insurtechs act as a managing general agency (MGA) appointed by an insurance company to administer its program. As an MGA, an insurtech will distribute the product and may also have some authority over underwriting and claims handling. In return, the MGA will receive a commission from the insurance company, which may vary based on the breadth of services the MGA provides and the profitability of the program. The term ”start-up insurtech" will be used throughout this paper to broadly represent insurtechs that operate under the MGA model.

The insurance company underwriting the MGA's program has risk-based capital (RBC) requirements, just like any traditional insurance company. To meet these statutory RBC requirements or maintain an acceptable rating from a rating agency, the insurance company may purchase reinsurance to offset some of the risk of this insurtech program. The insurance company may also place restrictions on the MGA’s capacity to grow or expand into new states.

An insurtech aiming for accelerated growth and greater independence might pursue funding to transform into a full-stack insurance company. Establishing a new insurance entity requires certificates of authority in each state, which, in multiple states, can take more than a year to obtain. To expedite market entry, some MGAs aspiring to become a full-stack insurance company may opt to acquire a SPAC already authorized in the target states. In this paper, the term ”full-stack insurtech" will generally be used to refer to insurtechs functioning as insurance companies in various capacities.

Insurtechs and the challenge for traditional insurers

To incorporate the use of technology in insurance, start-up insurtechs often employ a fail-fast mentality, which is “based on the idea of iteration and being data-driven when developing a business and an innovation.”⁸ The fail-fast mentality “is harder to find within traditional companies or larger corporations with historically complex organizational structures and relatively risk-avoidant tendencies.”⁹ In the pursuit of innovation in the market, leaders at start-up insurtechs need to make decisions quickly and with little internal oversight, especially in the early days of the venture. While news coverage and media hype tend to concentrate on the small number of highly successful insurtechs, “there are many insurtechs that disappear and die without any announcement at all.”¹⁰ This speaks to the risk-reward trade-off created with the fail-fast mentality. This level of quick decision making is possible at a start-up insurtech that has a handful of employees but is unrealistic at an even slightly larger company or one with more well-defined decision making and risk management frameworks.

If the ultimate goal of the insurtech is to go public through an initial public offering (IPO) or be acquired by another company, then the main focus of a start-up insurtech may not be to maximize shareholder value, but rather to increase the value of the company at all costs. The focus on high growth and emerging and untested technology can increase risk to a level beyond a traditional insurer’s risk appetite, especially if the insurer’s RBC requirements or financial ratings are impacted. Society benefits from traditional insurers being limited by capital requirements and robust risk management frameworks to ensure solvency, which can run counter to the goals of a start-up insurtech that aims to provide high returns for venture capitalists.

Traditional insurers typically have certain disadvantages when compared to both start-up and full-stack insurtechs. While perfect solutions for these shortcomings may not exist, it is imperative for traditional insurers to recognize these limitations and engage in self-disruption despite any limitations.

• Outdated technology/systems limitations: For traditional insurers that have been around for decades, their technology systems (e.g., policy, billing, claims, rating, etc.) are likely to be outdated compared to recently established insurtechs. Outdated systems limit the insurer’s ability to deliver a connected and personalized user experience, which is expected by many consumers today. Outdated systems may also limit an insurer’s ability to launch new products or modernize existing products.
• Decision-making infrastructure: With larger staffs, well-established decision-making frameworks, and entrenched risk management guardrails, traditional insurers may not be able to make decisions and deploy solutions to the market at the same speed as start-up insurtechs. Most insurers today will have innovation teams focused on self-disruption. After seeing the fate of once powerful companies such as Blockbuster, it is easy to overcorrect and predict that technological advancements happen at much faster intervals than is actually possible.

The importance of a target market

One aspect of a start-up insurtech’s success is whether the company can meet an unmet or unknown need in the marketplace. Successful innovation can be traced back to connecting with a target market. For well-established companies such as traditional insurers, an important goal in self-disruption is to proactively innovate in a way that enables the company to take market share of other traditional companies.

Self-disruption requires knowing a target market and understanding how the needs of this target market may evolve over time. There have already been many advances in the insurance landscape during the Insurtech Era that highlight the changing needs of the market. Provided below are two examples of potential future shifts in consumer needs that provide opportunities for traditional insurers to engage in self-disruption.

• Vehicle ownership to ridesharing: A 2017 study claimed that private car ownership in the United States would drop 80% by 2030. Instead of owning a car, “most Americans would hail self-driving, electric ride-shares to get around.”¹¹ While this view of the future may need to be pushed out beyond 2030, insurance companies need to plan for subscription services and other vehicle ownership models.
• Connected homes: There has been increasing consumer demand in recent years for smart home solutions, which provide benefits such as “chore automation, safety and security, and energy management.”¹² Insurers have opportunities to partner with technology companies to incorporate smart and connected home technologies into insurance products and services that provide conveniences to consumers, proactively provide recommendations on repairs and maintenance work, and reduce insurance losses through mitigation devices.

Advantages traditional insurers have over insurtechs

While traditional insurers cannot operate with many of the same efficiencies as start-ups and insurtechs, there are several features of traditional insurers that position them for success in the Insurtech Era.

Insurance/actuarial expertise

On a 2020 Tesla earnings call, just as the company was in the midst of testing a new insurance product in California, Elon Musk proclaimed, “We want revolutionary actuaries.”¹³ These words sent many traditional insurers scrambling as they also began to see the need for “revolutionary actuaries” at their own companies.

As previously discussed, some have made the case that the advances in insurance during this Insurtech Era have not been as radical as in other industries. One potential reason for this is due to the heavy level of state regulation, especially for products used by large numbers of consumers. Insurtechs by their nature are tech companies first, using a tech mindset to disrupt insurance. Traditional insurers have larger numbers of employees with insurance backgrounds than start-up insurtechs. Traditional insurers have the ability to identify individuals currently working at their companies who excel at innovative thinking and leverage their depth of insurance experience. It may be faster to teach an employee with an innovative mindset a new technology or skill than it would take to gain years of insurance underwriting or contract-drafting experience. This is why many insurtechs look for individuals with experience at traditional insurance companies to become their “revolutionary actuaries.” Often, these roles blur the lines between traditional insurance roles, with actuaries taking on data science and modeling tasks that may traditionally be performed by data or information technology (IT) teams.

Cost/expense advantage

As previously discussed, many start-up insurtechs are not full-stack insurers and instead operate as MGAs. MGA commissions are often much higher than those of insurance agents who sell products on behalf of traditional insurance companies. The loss cost and expense savings that insurtechs promise with new technology may not fully offset the higher commission expenses associated with an MGA, allowing the traditional insurance companies to be competitive on price.

Brand recognition

While the impact of brand recognition on product sales is difficult to quantify, it can be said that “If you have strong branding for your business, people will naturally take note of it much more than they would a business without it. A business that doesn’t really have any cohesive branding isn’t going to stay in someone’s mind for very long.”¹⁴

It takes time for new insurtechs to create strong branding that resonates with large segments of the population. When consumers look for insurance coverage, they may naturally turn to traditional insurers that have brand recognition and whose slogan has been stuck in their heads for decades. Despite declines in advertising budgets for large, traditional carriers in recent years, companies such as Progressive and State Farm still spent $1.22 billion and $992 million on advertising, respectively, in 2023.¹⁵ But traditional insurers should not get complacent; consumer preferences shift over time, which impacts marketing and brand awareness. Traditional insurers should continue refining their branding efforts to evolve with the times and avoid being left behind.

Data

Data is the lifeblood of an insurance company. A traditional insurer that has been around for decades has vastly more insurance experience data than a recently established insurtech. This allows traditional insurers to develop highly complex rating algorithms for certain lines of business that incorporate granular risk segmentation and numerous interactions of rating variables, which should provide advantages in terms of pricing sophistication over new market entrants that lack the data necessary to develop comparably sophisticated pricing.

While traditional carriers have the advantage in terms of data quantity, insurtechs are often distinguished by their ability to identify new sources of data. For example, an insurtech may have access to detailed driving data from a vehicle manufacturer, otherwise known as an original equipment manufacturer (OEM). This data may include detailed telematics data and the use of Advanced Driver Assistance Systems (ADAS) features, which at first glance may provide the insurtech with apparent risk classification data advantages over traditional insurance companies. However, potential factors limit the advantage an insurtech may have over traditional companies.

• The data may be limited to certain OEMs or may only be for newer vehicles.
• Even with detailed driving data, does this insurtech have the loss data needed to understand the relationship between the driving data and insurance losses to create more sophisticated pricing?
• The insurtech will need the expertise to obtain and incorporate additional data into a rating plan and account for the potential correlations the data may have with other rating variables.

Even if a traditional insurer cannot deploy innovative solutions to the market at the same speed as a start-up insurtech, the amount of insurance data available to the traditional insurer may increase the chance of success for innovative solutions that reach the market.

The future of traditional insurers

Businesses in other industries have learned from the failures of companies such as Blockbuster and understand the need to adapt to meet the evolving needs of consumers. In the P&C insurance industry, the traditional insurers that best adapt to the changes in the insurance market are unlikely to be the ones that fully attempt to embrace the start-up or insurtech mindset, as they will never be able to fully operate in this manner. Instead, the most successful traditional insurers over the next few years will be the ones that understand their advantages over new market entrants, address their shortcomings in an organized manner, and understand the current and future needs of a well-defined target market to enable self-disruption.

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¹ Naysmith, C. (May 25, 2023). Blockbuster Had the Opportunity to Buy Netflix for $50 Million but ”Laughed Them Out of the Room” – a $150 Billion Mistake. Yahoo Finance. Retrieved November 17, 2024, from https://finance.yahoo.com/news/blockbuster-had-opportunity-buy-netflix-185915158.html.

² Eisenstein, P. A. (October 20, 2016). A Driverless Tesla Will Travel From L.A. to NYC by 2017, Says Musk. NBC News. Retrieved November 17, 2024, from https://www.nbcnews.com/business/autos/driverless-tesla-will-travel-l-nyc-2017-says-musk-n670206.

³ Ralph, Olver (January 11, 2023). Why Technology Has Failed to Disrupt Insurance. Financial Times. Retrieved September 20, 2024 from https://www-ft-com.ezp-prod1.hul.harvard.edu/content/d2dffd24-8a14-4832-8ea0-1937268849f4. (subscription required).

⁴ Ibid.

⁵ Lemonade Inc (LMND on NYSE) closed on July 2, 2021, at $107.65 a share and closed on September 20, 2024, at $18.34 a share. Hippo Holdings Inc (HIPO on NYSE) closed on August 3, 2022, at $20.75 a share and closed on September 20, 2024, at $17.44 a share.

⁶ The term “shareholder value,” which is typically associated with stock insurance companies, will be used throughout this paper. However, the concepts and ideas in this paper apply equally to insurance companies with different structures such as mutual or reciprocal insurers.

⁷ Insurance Topics (July 3, 2024). Insurtech. NAIC. Retrieved November 17, 2024, from https://content.naic.org/cipr-topics/insurtech.

⁸ Hung, C. (June 1, 2022). Three Startup Mentalities That Can Inject Innovation Into Your Company. Forbes. Retrieved November 17, 2024, from https://www.forbes.com/councils/forbestechcouncil/2022/06/01/three-startup-mentalities-that-can-inject-innovation-into-your-company/.

⁹ Ibid.

¹⁰ Hollmer, M. (February 25, 2020). Dearly Departed InsurTechs: Expect Their Numbers to Rise. Carrier Management. Retrieved November 17, 2024, from https://www.carriermanagement.com/news/2020/02/25/203601.htm.

¹¹ Garfield, L. (May 4, 2017). Only 20% of Americans Will Own a Car in 15 Years, New Study Finds. Business Insider. Retrieved November 17, 2024, from https://www.businessinsider.com/no-one-will-own-a-car-in-the-future-2017-5.

¹² Verified Market Research. Consumer IoT Market Size and Forecast. Retrieved November 17, 2024, from https://www.verifiedmarketresearch.com/product/consumer-iot-market/.

¹³ Simpson, A. G. (July 24, 2020). Tesla Invites Actuaries to Help It Create a ”Revolutionary” Insurance Company. Insurance Journal. Retrieved November 17, 2024, from https://www.insurancejournal.com/news/national/2020/07/24/576871.htm.

¹⁴ Jones, K. (Mach 24, 2021). The Importance of Branding in Business. Forbes. Retrieved November 17, 2024, from https://www.forbes.com/councils/forbesagencycouncil/2021/03/24/the-importance-of-branding-in-business/.

¹⁵ Figuracion, K. (April 5, 2024). GEICO Leads Pack in Slashing Insurance Advertising Spend. S&P Global Market Intelligence. Retrieved November 20, 2024, from https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/geico-leads-pack-in-slashing-insurance-advertising-spend-81079056.